Horvitz & Levy, Peter Abrahams and Scott P. Dixler; Koeller, Nebeker, Carlson & Haluck, Martha J. Dorsey and Sarah P. Long for Defendant and Appellant. Dentons US and Jules S. Zeman; Goodkin & Lynch, Daniel L. Goodkin and Jacqueline G. Antonio for Plaintiff and Appellant.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2012-00596205) OPINION Appeal and cross-appeal from a judgment of the Superior Court of Orange County, Derek W. Hunt, Judge. Affirmed. Horvitz & Levy, Peter Abrahams and Scott P. Dixler; Koeller, Nebeker, Carlson & Haluck, Martha J. Dorsey and Sarah P. Long for Defendant and Appellant. Dentons US and Jules S. Zeman; Goodkin & Lynch, Daniel L. Goodkin and Jacqueline G. Antonio for Plaintiff and Appellant.
This is a complicated construction defect case between a contractor who finished the foundation to an otherwise unfinished apartment complex in Irvine and a new owner who acquired the property several years later. When the new owner restarted the project with new contractors, it discovered flaws (or what were perceived as flaws) in that foundation. The new owner sued the old general contractor for those flaws, alleging negligence, breach of contract, breach of express warranty and breach of implied warranty. The flaws litigated before the court were (1) the misplacement of the electrical and plumbing conduits in the foundation, and (2) a perceived "waviness" in the foundation. The new owner won on the misplacement of the conduits but lost on waviness, so we now have before us both an appeal and a cross-appeal.
The appeal is by the old contractor, claiming that because the old owner breached the contract in 2007 and 2008 by not making required progress payments, its express warranty concerning the conduits was extinguished. The cross-appeal is by the new owner, claiming that it was entitled to contract damages because the evidence showed the foundation in some places was not as thick as the specifications required.
We affirm the judgment against both attacks. The old contractor loses because the original contract made the owner's duty to pay a covenant independent from its duty to provide a foundation that confirmed to specifications. The new owner loses because it never actually raised the issue of the thickness as a breach of contract in the trial court.
A. Financing and Contract
This case, like so many, arises out of a project that ran afoul of the recession of 2007-2008. Back in the roaring mid-aughts - late 2006 to be exact - a KB Home entity named Coastal Irvine I LLC (Coastal) began plans to develop a 156-unit apartment project near the John Wayne Airport in Irvine.
The lender on the project was Residential Funding Company (Residential Funding). The collateral signed over by Coastal to Residential Funding included "All Development and Work and Homes," which specifically included all of Coastal's rights in any "Construction Agreements."
In late January 2007, Coastal entered into just such a construction agreement with defendant White Residential Inc. (White). The overall price of the project was about $43.7 million, to be paid incrementally, in progress payments. The contract contained a general warranty that the work would conform with the "requirements of the Contract Documents and Applicable Laws."
The termination and suspension provisions, detailed in article 14 of exhibit D to the contract, bear a little exposition. Article 14 specified three different scenarios under which Coastal might either suspend or terminate the project: (1) termination by contractor default (section 14.1); (2) suspension for the owner's convenience (section 14.2); and (3) termination by the owner without cause (section 14.3).
The provision for suspension for the owner's convenience provided the owner could "at any time" send a written notice to the contractor to suspend, delay or interrupt performance of the work. By contrast, the provision for termination by the owner without cause required five days' written notice.
"14.2.1 Suspension Order. Without limitation to the Owner's rights under Section 14.1, above, Owner may, at any time and from time to time, without the occurrence of any Event of Contractor Default or other cause, order the Contractor, in writing, to suspend, delay or interrupt performance of the Work, in whole or in part. Upon receipt of such suspension order, the Contractor shall comply with its terms and take all reasonable steps to minimize costs allocable to the Work covered by the suspension order during the period of the Work stoppage."
"Without limitation upon any of the Owner's other rights or remedies under the Contract Documents or Applicable Laws, the Owner shall have the option, at its sole discretion and without the occurrence of any Event of Contractor Default or any other cause, to terminate the Construction Contract or Work in whole or in part, by giving five (5) Days written notice to the Contractor." (Section 14.3.1.)
The topic of compensation to the contractor in the event of suspension or termination by the owner was dealt with in three separate subsections. First, subsection 14.3.3 addressed the topic generally, saying that the contractor was required to make a formal "Application for Payment," which it could include extraordinary costs for "demobilization," plus a 4 percent termination fee. The basic calculation would be based on the method previously set forth in subsection 14.1.5, which essentially provided for an accounting of amounts owed at that point. The subsection then provided the contractor agreed to accept the compensation under subsection 14.3.3 as "its sole and exclusive compensation in the event of a termination by Owner for convenience," thus foregoing compensation for things such as lost opportunity or incidental damages. And finally, the contractor was required to ensure that its contracts with any subcontractors provided for the contingency of termination by the owner without cause.
"14.3.3 Contractor Compensation. Following termination without cause and within sixty (60) Days after receipt of a complete and timely Application for Payment from the Contractor, an accounting shall be conducted in accordance with the accounting process set forth in Paragraph 14.1.5, above. In such event, the amount due to Contractor shall be the Contractor Amount as calculated in the same manner provided for in Paragraph 14.1.5, above, except that there shall be added to the calculation of the Contractor Amount an amount for: (1) any extraordinary Costs of Work that are incurred and paid by Contractor for demobilizing its facilities from the Site and administering the close out of its participation in the Project for a period of no longer than fifteen (15) Days, which Contractor demonstrates exceed and do not duplicate the Costs of Work that would have been incurred by Contractor for demobilization and close-out of the Project under normal conditions of Final Completion; and (2) a termination fee to Contractor based on four percent (4%) of the Costs of Work incurred and payable by Owner pursuant to preceding Clause (1) of this Paragraph 14.3.3."
14.1.5 is too long to quote in full, but key provisions are that it applies to "a termination or discontinuance of the entire Work" and requires an accounting.
"14.3.4 Exclusive Compensation. The Contractor agrees to accept the compensation allowed under Paragraph 14.3.3, above, as its sole and exclusive compensation in the event of a termination by Owner for convenience and waives any claim for Loss related to Owner's termination for convenience, including, but not limited to, loss of anticipated profits, loss of revenue, lost opportunity, or other consequential, direct, indirect, or incidental damages, of any kind."
Article 14 finished with language addressing warranties. We quote this language in full in part III.A.1. of this opinion; for the moment, suffice to say that it provided that warranties could attach even if only a "portion" of project was completed as long as that portion was "ready for use." Finally, we should note article 13 of the main contract provides for arbitration between contractor and owner. B. Work begins, then stops
Work began in 2006. Part of the project was the construction of a "podium deck" or "podium foundation" (it is referred to in the record at various times as either a deck, a slab, or a foundation).
But then a recession happened. Coastal fell behind on its progress payments in late 2007, failing to pay all of the November 2007 bill from White and failing to pay the December 2007 and January 2008 bills in their entirety.
By mid-December 2007, White was told by a KB Home executive that the reason for the default was that Coastal had decided to shut the project down. Nonetheless, Coastal wanted the podium deck completed and also wanted White to bill it for all work through that completion. White did not treat the stoppage of the progress payments as a breach - at least not initially - but merely as an interruption in a project it still hoped to finish. The internal email from Dan White announcing the stoppage to his fellow managers alluded to White's hope of salvaging the project by partnering with another investor to buy out Coastal's interest.
By January 21, 2008, however, White had formally complained about not being paid for its work and announced it would stop all work "until we receive the outstanding payments due." The letter also made reference to Coastal's (apparently oral at that point) authorization to complete the podium foundation. White's vice-president wrote: "Your failure of payment is causing us significant problems and financial hardships. As you know, you have authorized us to continue work on the podium foundation and related site work and you stated that you would be sending us a suspension notice for the remainder of the work. We have not yet received any such suspension notice but have been continuing work on the podium foundation and related site work per your direction. The money that you shorted us on the November 2007 draw combined with the unpaid amounts of the December 2007 and January 2008 draw is owned to subcontractors performing the podium foundation and related site work. We cannot continue this work without payment." The letter did not cite any contract provision involving contractor remedies in the event of owner default.
But neither did the letter elicit any more money from Coastal. Rather, the response was a letter from KB Home's director of urban construction dated February 1, 2008, formally directing White to "suspend all work, except as [otherwise] outlined." Coastal's letter also expressly invoked section 14.1.2 involving contractor default. That reference appears anomalous in retrospect, since the record discloses no assertion by Coastal of any default on the contractor's part as of the end of January 2008.
Here is section 14.1.2: "Without limitation to the Owner's other rights or remedies under the Contract Documents or Applicable Laws, if there is an Event of Contractor Default the Owner have the right to exercise any one or combination of the following remedies: [¶] .1 Take Over Work. The Owner may, without terminating the Construction Contract (including, without limitation, any obligation to adjust the Contract Price or Contract Time for any portion of the taken-over or non-taken-over Work) take over and perform, or engage others to perform, all or a portion of the Work. [¶] .2 Suspend Work. The Owner may, without terminating the Construction Contract and without incurring any additional liability or responsibility to Contractor (including, without limitation, any obligation to adjust the Contract Price or Contract Time for any portion of the suspended or non-suspended Work), suspend Contractor's performance of all or a portion of the Work for as long a period of time as the Owner determines, in its sole discretion, appropriate. [¶] .3 Termination. The Owner may, without incurring any additional liability or responsibility to Contractor, terminate the Construction Contract, the Work, or any portion thereof."
And what was "outlined" in Coastal's letter? The podium foundation, plus some other minor work. (There was a line item for "Concrete Podium ONLY Poured-Out, Shoring Removed, and Demobilized.") Coastal's letter also specified that the contract balance to complete the podium slab work was $796,000 and proposed a completion date of January 31, 2008. White would later stipulate that it "completed construction of the podium deck no later than February of 2008."
There is no evidence Coastal ever paid White the specific $796,000 balance to complete the slab work - at least before the parties would eventually settle. In fact, the record indicates otherwise. A KB Home executive testified that after the project was shut down White was owed "Three million plus." By March 24, White had filed a mechanic's lien against the property for $4.8 million. By June 2008, White was forced to sue Coastal for what it was owed and White later testified he was seeking around $7 million in the suit.
White wasn't the only party stiffed by Coastal. Coastal also defaulted on its obligation to its lender, Residential Funding. The property was then sold to a holding company known as RC Properties XVIII, LLC (RC), at a public auction in July 2009. Part of that deal was that RC also received Residential Funding's beneficial interest under the deed of trust.
RC sold the property to New Pacific in what appears to have a been two-step transaction in the late summer and fall of 2009. RC first entered into a sales contract with an entity called New Pacific Capital on August 13, 2009. It later transferred the property, on October 19, 2009, by grant deed to New Pacific Carlyle (New Pacific), which is the actual plaintiff before us here.
There is no argument in this case that the Capital-to-Carlyle transaction involved any different terms than the RC-to-Capital transaction. The point is significant, because the RC-to-Capital sales contract contained, in Article VI, an "As Is" clause. (We quote the full language of that clause in part III.A.1 below when we discuss White's argument in reference to it.)
For some reason, the purchase price of the transaction was redacted from the copies of the sales agreement in our record, but other than that, we discern no changes.
The RC-to-Capital-to-Carlyle transfer occurred in late 2009. But New Pacific did not begin to try finishing the construction until 2012. Meanwhile, White's suit against Coastal progressed to the point of settlement in January 2011.
The remarkable thing about that settlement agreement is what it doesn't contain. It does not contain any language that would purport to extinguish all existing warranties on whatever construction had been completed at the site. The agreement begins by defining the word "claims" to include not only White's desire to be paid, but also "compensation related to any parties' performance of any construction work," which presumably would include claims for deficient work. It defines "Related Persons and Entities" to include any parties "successors, successors-in-interest," and "assigns." The basic deal was that certain KB Home entities (broadly defined to include Coastal) would pay $1.35 million to walk away from White's suit. The $1.35 million was mostly allocated to a group of subcontractors, with a small amount left over for White itself. The five listed subcontractors received, if our math is correct, $1.287 of the $1.35 million. After all, those subcontractors - including the ones that had worked on the podium foundation - had gone unpaid up to that point. As far as any future claims were concerned, there is a release provision waiving any unknown claims. C. Work resumes, and the new owner sues
Now to 2012. As the trial judge put it, just "eyeballing" the foundation, it looked as if nothing was wrong. However, New Pacific soon learned that the plumbing and electrical conduits in the podium slab had been misplaced. Moreover, it turned out that the podium deck was wavy. There were depressions as much as two inches below level, a problem that had to be corrected before the project could be completed.
New Pacific brought its complaints to White's attention via a letter dated April 18, 2012, asserting there were "substantial defects in the deck of the Project." In May, New Pacific's attorneys sent White's attorneys a letter essentially making the point that New Pacific now held all "interest" in any defect claims under the construction contract and, additionally, that the settlement with Coastal had not extinguished any construction defect claims. White rejected the claims. Dan White would later testify that since he had settled with the KB Home entities, he felt his firm had no more obligations on the project. New Pacific filed this lawsuit the following September.
The exhibit book prepared by New Pacific for this appeal includes the letter, but the letter does not detail precisely what the defects were - a point we will revisit when we address the cross-appeal.
The case was tried to the court in two phases: liability and damages. As to liability for the purported waviness of the podium deck, the court held in favor of White on the related issues of negligence, professional negligence and whether White fell below the required standard of care. The trial judge concluded that "as a matter of physics and practice," such slabs are "subject to becoming uneven over a period of time, regardless of whether such changes can be seen by the naked eye, such properties being inherent in the nature of the material." We do not find in the court's minute order any reference to the specified thickness of the podium slab.
Wrote the court:
"Negligence. [¶] Plaintiff has failed to show by a preponderance of the evidence that it suffered any property damage or personal injury as a result of any of the alleged defects and negligence which were the subject of the instant action. Defendant's motion for judgment under [Code of Civil Procedure section] 631.8 is therefore granted on the first cause of action for negligence. Aas v. Superior Court (2000) 24 [Cal.]4th 627.
"Latent Defects [¶] Plaintiff also failed to show by a preponderance of the evidence that the condition of the concrete podium deck was at any time the subject of a latent defect caused by human negligence or failure of reasonable workmanship. The burden of the testimony at trial by witnesses on both sides (all of whom were sophisticated in the construction industry and/or structural engineering) was that poured concrete slabs are, as a matter of physics and practice, subject to becoming uneven over a period of time, regardless of whether such changes can be seen by the naked eye, such properties being inherent in the nature of the material. Indeed the very industry practice of 'snapping the lines' bespeaks the foreseeability of such changes and predictable degradation. Hence, the court also finds that the [Code of Civil Procedure section] 337.15 statute of repose is inapplicable to the concrete podium deck."
The conduits were another story. "By contrast," said the court, the placement of the plumbing and electrical conduits was "defective as the result of human error" and not subject to "widely known principles respecting the effect of time on a concrete slab."
Accordingly, the next phase focused on the damages for the defective plumbing and electrical conduits. That phase resulted in damages of $458,482, plus an attorney fee and costs award of about $250,000 based on New Pacific being the prevailing party. White has appealed from the $458,482 award based on the conduits. New Pacific has cross-appealed from the defense judgment insofar as it provides no damages for the deviations in the slab from the specified 13.5 inches.
A. White's Appeal
White makes two arguments against the judgment for misplaced conduits. As presented in its brief, it first says New Pacific never actually obtained Coastal's rights against White for breach of warranty, and that (in any event) Coastal's breach of the contract completely canceled the warranties in that contract. We take these arguments in reverse order from White's brief because, logically, the linchpin issue in this case is whether the warranties in the construction contract survived Coastal's breach in the first place. Only if we first determine they survived do we need consider whether they were eventually transferred to New Pacific.
1. Breach of Contract Issue
To paraphrase Frost, something there is that does not like an owner being able to sue on a construction warranty when the owner has failed to pay the contractor. It just seems wrong. However, while it is counter-intuitive, we find the trial court correctly analyzed the issue of the survival of White's warranty.
White states its argument in a strong, simple, declarative sentence: "When a party materially breaches a contract, the non-breaching party's contractual obligations are discharged." White notes the obvious - the provisions requiring Coastal to make progress payments are a material part of the contract, ergo White was necessarily "excused from any further obligations under the contract" when it "fail[ed] to pay for services rendered." Indeed, says White, at that point Coast "forfeited its ability to enforce the contract against White Residential."
To be sure, one can find such language, sans qualification, in three cases White cites us. (See Pry Corp. of America v. Leach (1960) 177 Cal.App.2d 632, 639 (Pry); Silver v. Bank of America (1941) 47 Cal.App.2d 639, 645 (Silver) and Lewis Publishing Co. v. Henderson (1930) 103 Cal.App. 425, 429 (Lewis).) All are inapposite. None involved whether construction warranties were extinguished by the failure of an owner to make regular progress payments.
Pry was a product licensing case and royalty case involving a solvent made with a secret formula. The defendants didn't pay royalties, which the court said was a condition precedent to being able to use the mixture. Hence the plaintiffs were within their rights to not to supply any more of the solvent. (See Pry, supra, 177 Cal.App.2d at pp. 639640.)
Silver involved the sale of parcels of land by a bank to a company under a deal whereby the bank would retain title, which would pass to individual buyers found by the company. The company also could lease unsold land to nonbuyers, but if there was a "bona fide" sale, the company was to turn over possession of the land to the bank. The company leased a parcel to a wouldbe dairy farmer, agreeing with the farmer that it would provide certain buildings, such as a barn. Then a fourth party made an offer to buy the land, which the company accepted. The wouldbe dairy farmer was then told to surrender the land. He didn't, and sued on the theory there had been no actual sale to the fourth party. The farmer won at trial, but the appellate court noted the plaintiff had not complied with the terms of the lease himself, and reversed one of the causes of action in a very short opinion in language reminiscent of estoppel: "One who himself breaches a contract cannot recover for a subsequent breach by the other party." (Silver, supra, 47 Cal.App.2d at p. 645.)
Finally, Lewis involved a contract in which the plaintiff publisher promised to deliver to a woman a rather expensive hand engraved portrait to be included in a set of books. The woman was to pay one half the price upon delivery of the proofs, and the balance on delivery of the books. But she died after the first payment. Her estate refused to pay for the delivered books on the ground the plaintiff had not really handengraved the portrait, but used machines; the trial court said there was a failure of consideration. (Lewis, supra, 103 Cal.App. at pp. 426427.) On appeal the plaintiff argued the estate should have returned the books, but the appellate court rejected that notion because the plaintiff publisher was itself in default. (Id. at p. 429.)
Thus none of the three cases deal with the issue of whether a construction warranty necessarily expires upon some failure of the owner to pay. And Pry alludes to the doctrine of dependent covenants, which implies a recognition of the corollary doctrine of independent covenants, which we are now about to explore.
Though White's opening brief never quite says exactly when Coastal forfeited its ability to enforce the contract, the necessary implication of its argument, given this record and the nature of this case, is that the moment occurred sometime prior to White's filing its mechanic's lien (March 2008), and in any event no later than June 2008, when it formally sued on its unpaid bills. Indeed, if we follow White's argument, Coastal's ability to enforce any warranties on the work automatically evaporated as early as the first deficient payment in November 2007.
This requires us to examine arcane principles going back to first-year contract law classes: dependent and independent covenants, and conditions precedent and concurrent to contract performance. These have been confounding lawyers for a long time, and have generated "much legal lore." (Musto v. Grosjean (1929) 208 Cal. 453, 459 (Musto).)
The idea that any time one party breaches a material provision of a contract the other party is automatically relieved of all duties of performance is just too broad. There are, as the logicians and mathematicians say, counterexamples. Those counterexamples show that when covenants in a contract are independent, the breach of even an obviously material one by a party does not necessarily excuse the other party of its obligation.
The most obvious counterexample is in landlord-tenant law. What is more "material" to a tenant's obligation under a rental contract or lease than to pay the rent? And yet, in Fairchild v. Park (2001) 90 Cal.App.4th 919 (Fairchild), tenants who were "behind in their rent" (id. at p. 921) were allowed to sue the landlord for the loss of personal property occasioned by a fire attributable to the landlord's breach of a provision of the contract because the two provisions were independent of each other. (See id. at pp. 921-922.) "The covenants to pay rent by the tenant and maintain reasonably safe premises by the landlord are independent and not dependent covenants." (Id. at p. 922.)
Courts have found other independent covenants outside the landlord-tenant context. Those contexts include family law (Verdier v. Verdier (1955) 133 Cal.App.2d 325, 334-335 [husband's support payments not discharged by violation by wife of covenant against "molestation"]; water rights (Fresno Canal & Irr. Co. v. Perrin (1915) 170 Cal. 411, 415-416 [customer's failure to make annual payments otherwise required by contract to water company did not excuse company's duty to furnish water]; Kaupke v. Lemoore Canal & Irr. Co. (1937) 20 Cal.App.2d 554, 557-558 (Kaupke) [obligation to furnish water independent of member of association's duty to pay assessments]); business sale contracts (Starr v. Davis (1930) 105 Cal.App. 632, 635-635 [violation of noncompetition clause in sale of florist business did not excuse duty of buyer to pay on note]); sales of mining property (Keys v. Mother Lode Extension Mines, Inc. (1933) 218 Cal. 542); and - particularly apropos to the case at hand - the development of a tract of land (Musto, supra, 208 Cal. at p. 458 [buyer of tract not excused from payments on note because failure of seller to put in certain streets]).
We must look at the nature of the contract itself and the facts of the case to determine whether performances are dependent on each other or independent of each other. As the Supreme Court said in Musto, it is a matter of deciphering the intent of the parties: "Did the parties to the contract and the mortgage intend that performance of the work specified should be a condition precedent to a recovery on the note and mortgage?" (Musto, supra, 208 Cal. at p. 459.)
Brown v. Grimes (2011) 192 Cal.App.4th 265 (Brown), is cited by White for this unassailable proposition: "When a party's failure to perform a contractual obligation constitutes a material breach of the contract, the other party may be discharged from its duty to perform under the contract." (Id. at p. 902, italics added.) Note the word "may."
But maynot always isis all that can be derived on White's behalf from Brown. Brown was a complex case involving a tripartite fee sharing arrangement between (1) a former attorney, Rossformer because he resigned when state bar proceedings were lodged against him; (2) Attorney Brown, for whom Ross worked, and (3) Attorney Grimes. The arrangement was that Ross brought to Brown a group of Texas cases, which Brown then handed to Grimes as lead counsel. For his part Brown did comparatively little work, so the arrangement was that Brown would receive 50 percent of his fees but pay most of them over to Ross, with Grimes receiving 50 percent but sharing them with local Texas counsel. Because Brown, at one point, reneged on his deal with Ross, thus exposing Grimes to claims by Ross, Grimes was ultimately held to be excused from paying Brown further payments than had already been paid. The "promises by Brown and Grimes were not independent." (Brown, supra, 192 Cal.App.4th at p. 279.) The court explained that its conclusion flowed from the dependency of Grimes' obligation on Brown fulfilling his: "Whether Brown's promise to compensate Ross is viewed as a condition or a dependent covenant or promise [citations], the trial court did not err in finding that the breach of that promise excused Grimes from further performance of the feesharing agreement." (Ibid.)
The circumstances in Brown thus showed an intent to have one party's performance depend on another's. But that is not the case before us, so Brown is inapposite.
We believe they did not. Coastal had the obligation to make progress payments while White had the obligation to conform its work to certain specifications. Neither obligation depended on the other one.
It seems to us that if White completed the podium foundation in such a way that it was ready "for use" by Coastal, the warranty that the podium foundation complied with the contract specifications was supposed to "continue" into the future. The key phraseology in section 14.5 is this: "All obligations of the Contractor under the Contract Documents with respect to warranties and guaranties of the Work will continue in force and shall apply, notwithstanding a termination or other discontinuance of the Work by Owner or Contractor pursuant to an exercise of its rights under this Article 14, to any portion of the Work that at the time of such termination or discontinuance is performed by the Contractor to the point that it is substantially ready (exclusive of any incidental work that maybe needed to connect such portion to other work . . . or Existing Improvements or to energize such portion of the Work for operation) for use or occupancy by Owner." (Italics added.)
The intention undergirding section 14.5 is that if the project were terminated or discontinued for any reason, the contractor's warranties would "continue" as to any portion completed and ready for use even if the project itself was not ready for full occupancy. By contrast, section 14.3.3 set forth a detailed procedure governing the contractor's remedies in the event of termination by the owner and extinguishment of warranties is not among them. Those remedies were: a formal application for payment, a four percent termination fee, and an accounting.
So, though the contract doesn't expressly address the problem of termination by the owner because the owner simply stops paying, the logical extension of the termination-without-cause provision, section 14.3, is that the contractor agreed the owner could terminate the contract for any reason, including lack of money. In that regard, the import of section 14.3.3 is that the contractor would ultimately have a remedy by way of an arbitration if it failed to obtain relief by way of an accounting. And the import of the arbitration provision in section 13.1 is that after exercising its right to an accounting, the contractor would be able to compel an arbitration on that accounting and ultimately obtain a judgment confirming an arbitration award based on it.
In fine, if the contractor weren't paid, it had a specified remedy via accounting, arbitration and court judgment on that arbitration. There is nothing to extinguish the express warranties for nonpayment; those warranties continued on, independent of the right to progress payments. A reading of the contract that would make warranties dependent on timely progress payments would have the practical effect of nullifying the "continue" language in section 14.5.
To be sure, in this case Coastal never really shut down the project according to Hoyle. Its letter of February 1, 2008, was framed as a letter of suspension based on contractor default. At that point there was nothing to show White had defaulted in any respect. Even so, as we have seen, White had its own independent remedies under section 14.3.3 and section 13.1.
2. Assignment Issue
The warranties thus survived Coastal's breach of contract. The next question before us pertains to White's second issue concerning the $458,482 judgment: Did Coastal's right to have the podium foundation conform to contract specifications finally get transferred to New Pacific?
We note, preliminarily, that even if White's 2011 settlement with Coastal had expunged White's warranties - which it did not - any such expungment would have come too late. The trial court impliedly found that whatever rights Coastal's lender had in the contracts were transferred to New Pacific at a point in time prior to the 2011 settlement. So the question is now, what precisely was transferred?
White bases its non-assignment argument based on two perceived weak links in the chain from the lender, RC, to New Pacific. The first was essentially an internal transfer from one RC entity to another in the process of foreclosing on the property in mid-2009. Recall that the original lender was Residential Funding Corporation, which we have called Residential Funding. Residential Funding's successor in interest was RFC Construction Funding, LLC (RFC Construction). In mid-July 2009, RFC Construction assigned the beneficial interest in its deed of trust to RC Properties XVIII, LLC, which we have called simply "RC." The transfer was part of the foreclosure on the property by which RC obtained the property. In the trustee's deed upon sale, there is a recital that transfers the collateral previously held by Residential Funding to RFC Construction ("collateral" being defined in a Uniform Commercial Code (UCC) Financing Statement).
The recital makes a specific reference to an attached exhibit A. When we went to exhibit A, we found that all of the debtor's interest in a list of six items of enumerated property - such as all development work and structures - was part of the transfer. The fifth item on the list is a catch-all that takes in "the Project, together with the Personalty." "Personalty" is defined a page or so later to include all contract rights and general intangibles arising out of the project.
From the fifth paragraph of the recitals: "This sale was a unified sale of real and personal property. The undersigned further sells, transfers and conveys by quitclaim to grantee the personal property security and collateral under that certain UCC Financing Statement filed in the Office of the Delaware Department of State as Instrument Nos. 20071604064 and 20071604247 on 04-30-2007 and any amendments or modifications to either of them, as described in the Notice of Sale, SEE EXHIBIT 'A' ATTACHED HERETO AND MADE A PART HEREOF."
The clause in its entirety: "Personalty: shall mean all personal property (other than Fixtures) now or hereafter located in, upon or about or collected or used in connection with the Project, together with all present and future attachments, accessions, replacements, substitutions and additions thereto or therefor, and the cash and non-cash proceeds thereof, including, without limitation, all goods, equipment, furniture and furnishings (including, without limitation, all appliances, satellite television equipment, light fixtures, drapes and window coverings, floor coverings, laundry equipment, and office equipment), the Construction Agreements, the Project Agreements, all drawings, plans and specifications, and all accounts, contract rights and general intangibles (including any insurance proceeds and condemnation awards or compensation) arising out of or incident to the ownership, development or operation of the Project." (Italics added.)
Everything seems copacetic: the transferee was receiving the lender's rights in the original contract, which in turn derived from the original owner's collateral. But then comes the rub: the sixth item of the list. This item is read by White to exclude the construction agreement from the definition of collateral.
"The non-exclusive use of (l) the Plans and Specifications, (ii) trade names, trademarks and service marks, including, without limitation, the right to use the name for the Project (subject to any franchise or license agreements relating thereto), and (iii) all of Debtor's right, title and interest in and to an rights, documents, or instruments arising out of or in connection with the Project and the construction of the Development Work and Construction Improvements on the Project, whether now or hereafter existing, Including, without limitation, the following: [¶] [then follows of six items, not otherwise germane, such as insurance policies] together with all products and proceeds of all the foregoing, in any form, including all proceeds received, due or to become due from any sale, exchange or other disposition thereof, whether such proceeds are cash or non-cash in nature, and whether represented by checks, drafts, notes or other instruments for the payment of money; provided, however, that Collateral shall not include any Project Agreement, Construction Agreement, Lease, Sales Agreement or any other agreement whatsoever except for an Governmental Reimbursement Reassignment Agreements." (Italics added.)
We part company here. It seems remarkable that a transfer from one corporate pocket to another would go out of its way- in several places - to clearly include the transferor's rights in a construction contract, and then, in a subordinate clause in a list of one of the items being transferred, exclude those rights. The seeming self-contradiction appears to be the main reason that New Pacific's respondent's brief heavily relies on parol evidence, especially that of Marc Liverant, New Pacific's lawyer who negotiated the RC-to-New Pacific transfer. Liverant testified that New Pacific wanted to obtain any warranties under the relevant UCC financing statement. Liverant also testified that his own experience in representing "a lot of lenders" had led him to observe when lenders foreclose on a project they "want to make sure they obtain the construction agreements" and any warranties in particular.
Judge Hunt was not impressed by New Pacific's reliance on parol evidence to interpret the trustee's deed, pointing out that it was the court's interpretation of the document, not one of the parties, that was dispositive. "I am not inclined to give too much weight to how somebody interprets a legal document except for me." (Under the objective theory of contracts, courts look to what a contract actually says, not what one of the parties thinks it should say. (Reilly v. Inquest Technology, Inc. (2013) 218 Cal.App.4th 536, 554-555, citing Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc. (2003) 109 Cal.App.4th 944, 956.))
That said, we also agree with the trial court that, objectively, Coastal's contract rights got transferred from the one RC entity to the other in the July 2009 trustee's deed upon sale. We need not resort to the rule that permits parol evidence to interpret ambiguous language in a contract. On close scrutiny we do not find the trustee's deed on sale to be ambiguous. It can be internally harmonized.
When language is structured in an outline format, particularly with typographical indentations, that structure carries weight. (See American Star Ins. Co. v. Insurance Co. of the West (1991) 232 Cal.App.3d 1320, 1327 ["In this case, both the outline format of the policy and the typographical indentation of the language relied on by ICW compel the conclusion the language within category "f." relied on by ICW has no application to category 'a.'"].)
Here, in exhibit A to the trustee's deed upon sale, there is a plain conveyance of all of the debtor's (i.e., Coastal's) interest in a list of six items of enumerated kinds of property, the fifth of which includes "Personalty," with Personalty later being defined to include "contract rights." Then comes the sixth item, upon which White relies, which seemingly excludes the construction agreement. But there is no exclusion of the construction agreement as such, only any "non-exclusive use" of various items, such as trade names, or plans and specifications.
Courts construe language to be internally harmonious if possible, especially in the context of the conditions prevalent at the time of the contract. (Woodard v. Glenwood Lumber Co. (1915) 171 Cal. 513, 519 [construing contract so that it "harmonizes with the true intent of the agreement as evidenced by the conditions surrounding the parties at the time they contracted"].) In the present case, we must remember the conditions surrounding these parties: This was essentially an internal transfer between two pockets of the same entity. Thus it would make sense the transfer might contain some language addressing the non-exclusive use of the construction agreement so as to make sure that the transferree would receive the exclusive use of it. On the other hand, it would make no sense at all for a lender's trustee under a deed of trust (the transferor) to retain in a vacuum benefits under a construction contract that should naturally accompany the fee ownership in the property. Bottom line: we conclude the trustee's deed upon sale did not carve out and withhold Coastal's rights in the construction contract. There would have been no reason to do so.
That leaves the second of White's attacks on the chain of assignment, the As-Is clause in the transfer between RC and the "Capital" arm of New Pacific. Though it takes three hefty paragraphs, we set forth the As-Is clause in the margin.
The As-Is clause opens with: "(a) Except for Seller's representations and warranties expressly set forth in this Agreement and in any documents delivered pursuant to the terms hereof by Seller to Purchaser at Closing, Purchaser acknowledges that it will be purchasing the Property based solely upon its inspection and investigation of the Property and that Purchaser will be purchasing the Property 'as is' and 'with all faults' based upon the condition of the Property and the status of government approvals as of the date of this Agreement, subject to the provisions set forth in Section 9. [¶] (b) Except for Seller's representations and warranties expressly set forth in this Agreement and any documents delivered pursuant to the terms hereof by Seller to Purchaser at Closing, Purchaser acknowledges that neither Seller nor its consultants or agents have made any representations or warranties of any kind upon which Purchaser is relying as to any matters concerning the Property, including, but not limited to: [a list of 17 items, none of which mention the state construction already on the property]."
Then there is this language, in all capitals in a box on the next page: "Except for seller's representations and warranties expressly set forth in this agreement and in any documents delivered pursuant to the terms hereof by seller to purchaser at closing, seller makes no warranty or representation, express or implied, or arising by operation of law, including but not limited to, any warranty of condition, habitability, merchantability or fitness for a particular purpose, with respect to the Property. Seller specifically disclaims any and all warranties regarding any prior construction, whether of infrastructure (e.g., utilities, streets, etc.), vertical improvements (garage, podium deck and other structures), or otherwise." (Italics added.)
And finally there was this clause on the next page, noting the incomplete condition of the property: "(d) Seller hereby discloses to Purchaser that Seller acquired the Property, while construction was in process but not yet complete, from the original developer/builder through mortgage foreclosure proceedings and that Seller did not design or construct the Property or any improvements which are a part of the Property. Purchaser acknowledges that construction within the Property is incomplete and that Purchaser will, during its due diligence investigation, satisfy itself as to all matters relating to said construction, including without limitation, status of completion, quality, compliance with applicable laws and private covenants. Purchaser acknowledges and agrees that Seller makes no warranties, express or implied, and Purchaser hereby releases and waives any and all rights, claims and actions based on warranties or similar legal principles, regarding the design and/or construction of the Property or any improvements which are a part of the Property."
The key point to be derived from the footnote is that there is nothing in it that expressly says "as is" means "no warranties that might exist in which the contractor is the obligor." "As is" might simply mean: you get what the property has, with existing warranties if any, or not. The most one can wring out of the As-Is language is that the seller wasn't making any warranties about warranties. Any warranties were what they were.
White's warranties thus survived to be transferred to a new owner, just as much as the existing podium foundation did. And of course such a construction harmonizes with the realities of the transition: RC itself would not want to be on the hook for defective construction prior to its acquisition of the property, so an As Is clause would naturally be included.
3. Attorney Fees
White's challenge to the attorney fee award is premised solely on the hope of reversal. That hope having proved chimerical, there is no reason to disturb the fee award. B. New Pacific's Cross-Appeal
New Pacific's cross-appeal is based on a simple syllogism: The contract incorporated by reference the multitudinous specifications for the project, among which was that the podium foundation be 13.5 inches thick. But the evidence was uncontradicted that the podium foundation was not uniformly at least 13.5 inches. In at least one place it was only 12.5 inches. (Exhibit 578.) Therefore, argues New Pacific, it was entitled to have a judgment making White liable for breach of the warranty that it would deliver a podium foundation conforming to contract specifications.
While there was trial testimony alluding to the need for 13.5 inch thickness, it is telling that in its opening brief on its cross-appeal New Pacific gives us no specific page reference to the contract itself. It only cites us to the existence of two exhibits - 156 and 246. But exhibit 156 is no less than 275 pages and takes up an entire binder, and exhibit 246 is a collection of blueprints and technical drawings that take up no less than two binders, and extend to 210 pages. New Pacific never tells us on what page in the contract itself the 13.5 inch requirement is to be found. A block reference, in this case to an entire binder, does not comply with a party's obligation to establish facts on appeal with record references. (See Bernard v. Hartford Fire Ins. Co. (1991) 226 Cal.App.3d 1203, 1205.) The omission is telling because if New Pacific had squarely argued to the trial judge that it was entitled to win based on the contract specifications, one would expect it to cite the judge to the exact page of the contract that required the 13.5 inch thickness.
In making its argument New Pacific recognizes it lost at trial on the negligence and standard of care issues. However, New Pacific stresses that just because the podium deck was built to an appropriate standard of care doesn't mean it complied with the contract. New Pacific points out that a contract can impose a warranty that is independent and requires a higher level of performance than industry reasonable care. (Cf. Basin Oil Co. v. Baash-Ross Tool Co. (1954) 125 Cal.App.2d 578, 596 ["Where a breach of warranty is established, liability is imposed entirely independent of the question of negligence on the part of the seller."].)
This is an interesting argument but it was not raised below. It would be unfair to both the trial judge and White to reverse the judgment on this basis, so the law precludes us from doing so. (Nellie Gail Ranch Owners Association v. McMullin (2016) 4 Cal.App.5th 982, 997.) We note in this regard that Judge Hunt's minute order on phase one of the trial makes no reference at all, under any heading, to thickness as a violation of warranty or contract. We do not think the omission was the result of judicial oversight. Rather, as we will show, the omission is consistent with the fact the claim was not presented to the trial court in the first place.
To attempt to fill this gap, New Pacific reasons from the evidence that the deck was insufficiently thick by trying to invert the burden of proof. Much of New Pacific's cross-appeal is focused on the proposition that it was incumbent on defendant White to prove, at trial, the podium was finished according to specifications back in 2008, and that New Pacific had no burden to prove breach of the contract back at the time. But the argument assumes a claim was raised which would have put White on notice of the need to show the podium was finished correctly back in 2008, and we do not find any such claim. However, having examined the record in detail, we find New Pacific never attempted to show a contract violation based on inadequate thickness of the deck back in 2008.
Consider this complaint from page 23 of the cross-appellant's reply brief: "the complete absence of evidence against NPC's cause of action for breach of the contract specifications on the concrete podium deck."
And, more fundamentally, New Pacific's argument turns the normal burden of proof on its head. It is fundamental that, it is the plaintiff who bears the onus of proving the elements of each cause of action. (E.g., Cassady v. Morgan, Lewis & Bockius LLP (2006) 145 Cal.App.4th 220, 234; Evid. Code, § 500 [quoted in part III.B.2 below].) "Whatever plaintiff is obligated to plead, plaintiff is obligated to prove." Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 654. It was the plaintiff who had the obligation here.
Had the point been fairly put to the trial court, one would expect to find considerable debate on it. Given the legal intricacy of a claim that requires a defendant to prove compliance with a contract rather than the plaintiff proving breach, it is hard to imagine New Pacific's argument not being a subject of intense interest to the trial judge - if it had been presented to him. New Pacific presents no actual quotations from the record which might prove the issue was squarely raised in the trial court. (See Cross-Appellant's reply brief at pp. 20-22.) In an abundance of caution, we have looked in the four places where the issue might have been raised.
(1) The complaint. The complaint alleged breach of contract and breach of express warranty in causes of action two and three, and makes reference to the improper placement of the conduits but no specific reference to lack of specified thickness. While New Pacific says that simply attaching a copy of the contract was good enough, we note: The main contract ran 31 pages and its exhibit D ran almost a 100 pages. And the specifications on which New Pacific now relies run no less than 270 pages. The needle in the haystack and hide the ball cliches seem unavoidable here. In substance, White was given no notice at all of any claim based on violation of the 13.5 inch specification in the complaint. (See Griffin Dewatering Corp. v. Northern Ins. Co. of New York (2009) 176 Cal.App.4th 172, 210-211 [contract breach claim insufficiently presented in complaint because plaintiff failed to specify nature of the particular oral promise on which it later based its case].) And the complaint was never amended. (See id. at p. 211 [need to actually present a request to amend to the trial court to proceed on appeal on theory based on such an amendment].)
(2) The trial brief. New Pacific's trial brief makes reference to the problem of waviness. It also says that "After Defendant was given formal written notice of the construction defects plaguing the Project, in or about April 2012, White Residential, Inc. met with Plaintiff and thoroughly inspected the Project."
However, when one looks at the formal notice sent by New Pacific's lawyers dated April 18, 2012 - which is exhibit 40 in a set of exhibits prepared by New Pacific for this appeal - there is no reference to any specific defects. We find only a catch-all allusion to "substantial defects in the deck of the Project." The trial brief also has an encapsulation of the claims being made by plaintiff New Pacific which makes specific reference to the conduits, but has no specific mention of thickness as an automatic violation of the contract or warranty.
"At trial, Plaintiff's experts will testify that Defendant's construction of the Project did not comply with the Project's plans and specifications. To that end, Plaintiff contends, among other things, that: (1) Defendant improperly constructed the concrete on the podium deck which led to the damage to the concrete, (2) Defendant's work at the Project also damaged the plumbing and electrical work, including, without limitation, the feeder conduits, and (3) Defendant incorrectly installed other work, which led to further 'tear and repair' property damage at the Project."
The trial brief also had a "Cost Matriz" [sic] for New Pacific's "Deck Claim" attached as its exhibit A. It is a handy breakdown, to the penny, of New Pacific's list of damages (totaling $1,031.772.72). The need to correct thickness is not listed.
The categories are: leveling topping, additional topping, anchor bolts, electrical, deck delay claim, deck claim plumbing coring and framing, level 1 vanities. And garage swing gates.
"At the outset, it should be noted that pursuant to the Court's request, the following brief is limited is a summary of relevant law at issue in the instant action and does not specifically address the evidence presented at trial (for example, evidence of the assignment to Plaintiff and evidence of the subject construction defects). Instead, Plaintiff will discuss such relevant evidence during its closing arguments scheduled for January 6, 2014."
(4) Oral Argument. While New Pacific's closing oral argument did allude to the topic of foundation thickness, the overall context was as part of its waviness claim, which was founded on a theory of breach of the standard of care, and which the trial court rejected on the merits. We now parse the oral argument in detail:
Relatively early on in the oral argument, the trial court identified "three main elements that I think you have been focusing on throughout this trial." The first was "the level of the concrete podium deck." The court went on to identify the second element as the "placement of these cans for plumbing and electrical," and the third element was a general, categorical point that White had fallen "below the standard of care." New Pacific's counsel did not take the opportunity after the trial court's list to proffer a supposed fourth element, namely a podium deck not built at minimum thickness levels as required by the contract. Rather, he segued to the subject of White's possible liability for professional negligence.
A few moments later, New Pacific's counsel was in the process of addressing the waviness claim. The trial court interjected to adumbrate its ultimate ruling on the waviness issue, namely that since concrete tends to "shift over a period of time," there needed to be proof the foundation was too wavy when White finished it. New Pacific's counsel came back with the point that the waviness was not insubstantial - it "wasn't [just] a little bit wavy," thus implying it was really wavy, perhaps so wavy that one could infer it was built that way back in 2008. The court, however, responded with the observation that the pictures in evidence did not actually illustrate such "more-than-a-little" waviness.
Counsel then mentioned that exhibit 578 showed an "issue" of "thinness of the deck, as well as waviness," and said "we are talking two different things." But he didn't mention thickness in the context of being a breach of the contract. He went back to negligence, focusing on "the standard of care issue in terms of the waviness and the thickness of the deck."
Exhibit 578 is a big piece of paper which has two images on it: The top is a kind of curved bridge with "13 1/2" written over it, and underneath a kind of straight bridge with "12 1/2" written on it.
He then said one of his witnesses, a structural engineer named Abraham Blanda, who was in charge of structural design for New Pacific's Carlyle project and turned to the subject of "deflection." Deflection is a contractor's term of art for changes in concrete over time, and in addressing the subject of deflection, New Pacific's counsel noted that his witness Blanda had provided exhibit 185(A). The exhibit showed "the tolerance for deflection was three-eights of an inch, that the ultimate differential between 13-and-a-half and 12-and-a-half of the thickness of the deck was far greater in a lot of spots than the expected tolerance." Thus the exhibit, said New Pacific's counsel, "ruled out that there was any sort of deflection as being the problem." Thickness as such was not mentioned, and certainly not in the context of being an automatic contract violation.
Exhibit 185(A) is a blow up entitled "Long Term Deflection - Self Weight: Max Deflection Plan." It looks like one those thermal image weather maps showing blue, green, yellow orange and red blobs of color.
New Pacific's counsel then returned to the subject of the standard of care. He mentioned that his expert witness Gregg Brandow "made it very clear that the contractor did not meet the standard of care when it came to the flatness and thickness of the deck." He elaborated that Brandow had testified there was circumstantial evidence the standard of care was violated because the contractor had not put in screed "control points" within 72 hours of pouring the concrete to make sure it met the required flatness or "thickness of 13-and-a-half inches." But while White might not have put in screed control points to ascertain the thickness, counsel did not point to any evidence establishing the deck did not meet the 13-and-one-half-inch standard back in 2008 as a contract violation.
New Pacific then emphasized what White hadn't done - it hadn't affirmatively shown that the concrete was compliant at the time of construction. This was as close as we have found to his raising any legal argument about burden of proof, and it is not close enough: "White Residential is the one that knew what was the way they handled the construction, and there was no testimony from White Residential that they did in fact satisfy what was required under the specifications of the drawings." New Pacific's counsel did not take the opportunity to expound on the point or mention 13.5 inches, and we cannot find in it support for a breach of contract claim based on thickness.
Later the trial judge recapitulated his understanding of the issues this way: "As I said to Mr. Goodkin earlier, in terms of the quality of the work, they have got three main arguments: one, the waviness and perhaps the thickness of the cement on the podium; two, placement of the cans for the electrical; and three, placement of the cans for the plumbing."
When it came time for rebuttal, New Pacific's counsel again did not take the opportunity to correct the judge's framing of the issues or say that the "thickness" to which the judge had alluded was its own, stand-alone, violation of the contract.
It is important to keep in mind the difference between a claim that the podium was too wavy because it was too thin in spots, and a claim that any thin spots by themselves violated contract specifications. The trial judge recognized the former claim, hence his reference to thickness. But the latter was never squarely presented to him, as the context of the oral argument shows.
He did address the question of whether White was given notice of the defects which gave rise to the suit. New Pacific's counsel specifically pointed the court to exhibit 43 in that regard. Exhibit 43, however, does not appear in the book of trial exhibits prepared by New Pacific for this appeal. The tabs skip from 41 (a letter of April 20, 2012, by New Pacific's counsel to White) to 44 (a letter of May 10, 2012, by New Pacific's counsel to White's counsel setting forth the chain of transmission of the collateral from the lender to New Pacific). Whatever notice exhibit 43 gave to White in 2012, we don't have it in our record.
See Sanders v. Walsh (2013) 219 Cal.App.4th 855, 873-874 [failure to present exhibits amounted to insufficient record to show error on appeal].) --------
The waiving of an issue on appeal because it was not raised at the trial level is a common law doctrine whose core value is fairness to the trial court and the opposing party. (See e.g., People v. Saunders (1993) 5 Cal.4th 580, 590 ["'Often, however, the explanation is simply that it is unfair to the trial judge and to the adverse party to take advantage of an error on appeal when it could easily have been corrected at the trial.'"]; Doers v. Golden Gate Bridge etc. Dist. (1979) 23 Cal.3d 180, 184-185, fn. 1.)
There are exceptions, of course: For issues of public interest (see In re Marriage of Moschetta (1994) 25 Cal.App.4th 1218, 1227-1228) or matters that are solely issues of law which the appellate court in its discretion decides to consider (In re Marriage of Smith & Maescher (1993) 21 Cal.App.4th 100, 107, fn. 4). Neither is applicable here.
As we said, the problem is fairness. White was never given a straightforward claim to the effect that it had to prove contract compliance back in 2008 in order to defeat a lack-of-required contract thickness claim. Rather, the references to thickness were always in the context of a discussion of waviness or of the standard of care. It is further significant that there was no new trial motion, which is what one would expect if the issue had been raised but the trial court had inadvertently overlooked it. Finally, the relatively exotic legal point that the case required an inversion of the normal burdens of proof was never mentioned. We thus conclude the issue of whether New Pacific is entitled to a breach-of-contract win on the 13.5 inch thickness issue was waived.
The judgment is affirmed. In the interests of justice each side will bear its own costs on appeal.
BEDSWORTH, ACTING P. J. WE CONCUR: MOORE, J. THOMPSON, J.